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FCA MIFID II Product Governance review: Manufacturers’ activities found to be “not in line with MiFID II Product Governance regime” increasing the “risk of investor harm”

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The FCA has recently published its MIFID II Product Governance Review and highlighted ‘significant scope for improvement’ in product governance arrangements. The FCA visited 8 asset managers/manufactures and selected case study products from each. In conclusion the FCA indicated that they “will continue to focus on product governance” and may need to make further changes to the rules and guidance to all manufacturers and distributors caught under MIFID II.

The FCA findings raised several concerns. In general, they concluded that asset managers (manufacturer/ product provider) were not undertaking activities in line with MIFID II’s PROD regime. Specifically, they identified shortcomings in several areas:

  1. Product Design – where only one manufacturer appeared to have considered a negative target market, and even one instance of negative target market overlapping with existing investor base
  2. Conflicts of Interest – where frameworks for managing conflicts of interest were ‘not all effective’
  3. Product Testing – Variations in approach, with differences analysis methodology and components
  4. Costs Disclosures – differences in disclosures between marketing brochures and investor documents (KIIDs), exclusion of charges from disclosure such as portfolio transaction costs.
  5. Distributors – Variable quality of due diligence of distributors, challenges in obtaining data from distributors, reluctance by the managers due to commercial sensitivity.
  6. Record keeping – labelled as ‘poor’ for most of the group surveyed, attributed to lack of formal process in product design and oversight.  Managers that had not recorded challenges or checks were not able to recall the past activities.
  7. Training – varying in quality, not always including importance of needs of and outcomes for the end investor.

It is evident that the FCA does not accept difficulties in the communication between product providers and distributors as any sort or acceptable excuse, and their recommendation here is for firms to be ‘more assertive and work towards a collaborative relationship’. The findings and reminders laid out in the review highlight that the two-way exchange of information anticipated by MIFID II, deemed critical in a market with a high reliance on intermediated services, is falling way short of the mark. The problem areas will serve as indicators of where FCA’s focus will lie in its potential update of rules and guidance.

Inspire Due Diligence

Delta Capita launched their global due diligence service in 2019 that coordinates centralised outreach to counterparties collecting the KYC and KYD documentation that Manufacturers need to complete due diligence of Distributors. Starting in Europe, more than 300 Distributors are now covered by the service, which expanded to the US and APAC last year. Delta Capita has peer reviewed and standardised documentation and secure 2-way information exchange for the mutual benefits of manufacturers and distributors, complying with clear expectations set by the FCA as part of this most recent product governance review.

Contact us here to find out how Delta Capita inSPire Due Diligence can help you achieve quickly address the issues raised by the FCA on the obligations and communication between product providers and distributors.

Contributors: Oliver Perry